Business under regulatory framework

2017 was a year of transformations, regulations and compliance for the retail jewellery industry. Demonetisation, the Goods and Services Tax (GST), the Prevention of Money Laundering Act (PMLA), compulsory hallmarking — all these complex ongoing processes heavily shaped the way business was conducted last year. The Retail Jeweller reassesses the impact of these major developments and looks at the path ahead.

The series of developments which the year 2017 witnessed had such a far-reaching effect that it can realign the jewellery retail landscape. The year began with the after-effects of demonetisation and ended with the prospect of hallmarking being made compulsory. So, it seems that the industry is at an inflection point and time is apt to take a look at how the year has gone by.

The dance of demonetisation

Even with the benefit of 12 months of hindsight, jewellers across India agree that their industry and business was severely affected by the demonetisation of 8 November 2016. That is, the decision of Prime Minister Narendra Modi to withdraw from circulation, overnight, all Indian currency notes in denominations of Rs500 and Rs1,000.

“The economy was at its peak in November last year when demonetisation was announced all of a sudden,” says Vastupal Ranka, director, Ranka Jewellers, Pune, Maharashtra. “The decision brought the economy down in one go.”

What was demonetisation for? The government has offered different answers at different times: for rooting out black money, fighting counterfeiting and terror, promoting digital payments and the “cashless” economy, mobilising savings. The jury is still out. The fact is, however, that demonetisation set the pace and tone of the trade for well over half a year.

“After the announcement of demonetisation, customers spent a lot on jewellery to park their money,” says Rajan Rastogi, director, Lala Jugal Kishore Jewellers, Lucknow, UP. “And this buying spree had a cascading effect on sales in 2017.”

According to the India Bullion & Jewellers Association (IBJA), which has 2,500 members, Indian jewellers sold 15 tonnes of gold ornaments and bars worth Rs5,000cr on the night of November 8–9 last year. Given that this country’s total annual consumption of gold is 800–1,000 tonnes, this is a very sizeable volume. It equates to more than one-fifth of the normal monthly volume of gold sold across India.

Demonetisation changed the long-standing attitude of Indian consumers towards savings. Gold in India represents family financial security, and it is traditional for women to save a little money every month from the household budget to invest in gold jewellery. “There has been a significant drop in such spending after demonetisation,” says Shankar Kedia, owner, Marilam Jewellers, Amritsar, Punjab. “There has been a mindset change, and a lot of savings are accumulating in banks.”

Undeniably, the shrunken volume of cash in circulation since demonetisation has impacted the industry. But the impact has been uneven around the country, with urban and corporate centres feeling the pinch of cash shortage far less than rural areas in North India and other regions, where cash use is more prevalent and where the supply of currency notes to local banks has been slower to pick up. Because of demonetisation, the cash-led purchase of jewellery among the consumers from the affluent section has gone down significantly. According to a leading retail jeweller in Mumbai, the decrease in cash transaction in that consumer segment after demonetisation is as much as 20%.

Among the metros, Bengaluru in particular was quick to shake off the demonetisation woes. “Compared with other cities, the trend and scope of storing and using unaccounted money is very small here,” says Pratap Kamath, managing director, Abaran Timeless Jewellery, Bengaluru, Karnataka.

Organised players testify to a fall in cash use. “The share of cashless transaction, which contributed 10–15 per cent of annual turnover in the last few years, went up to 30 per cent in FY2017,” says Saurabh Gadgil, CEO, PNG Jewellers, Pune, Maharashtra. “Housewives who used to come to our stores to buy jewellery with cash are now using plastic money. As time goes by, one will see more and more people avoid cash payment.” Another confirmation of this trend comes from Suvankar Sen, executive director, Senco Gold and Diamonds, Kolkata. The share of cashless transactions at Senco went up to 40 per cent in FY2017, he says.

Compliance is the new buzzword. In consequence, many customers now patronise organised retailers rather than the unorganised players. “We have gained new customers because consumers have started relying on the organised players more,” says Gadgil. “The trend of new customer acquisition will only grow with time.”

C K Venkataraman CEO, Jewellery Division, Titan says, “Demonetisation has had a psychological impact on people about unaccounted money, making them feel rather safe about spending money with respectable jewellers. This has resulted in a migration of such customers to the big names.”

Kalyan Jewellers, too, has added customers since demonetisation was done and the goods and services tax (GST) regime came into force. Executive director Rajesh Kalyanaraman clarifies says, “Our same-store sales have increased this year. We are in the process of ascertaining the reason behind the new customer acquisition. Has it happened because of the change in inventory management strategy, or because of the change in price competitiveness? Inventory will continue to be shuffled. I think pricing surely had a role to play. Due to the GST, jewellers from the unorganised sector are finding it difficult to procure gold at a cheaper rate. They are losing price competitiveness.” The new tax regime may not have had as large and immediate an impact on sales as demonetisation, but it does help level the playing field for all jewellers. As such it holds out the promise of developmental change across the industry.

The GST effect

The GST is the single most important change to confront the Indian economy this year. Jewellers are largely optimistic about its effects. “The documentation has increased, but the accounting process has simplified. That is, in itself, a huge benefit,” says Vishal Bohra, director, Abhushan Jewellers, Bengaluru. “In addition, pipeline compliance has ensured that there is clarity at every step.”

The new tax regime has helped jewellers extricate themselves from the profitability-eroding multiple-tax structure that it replaced. “Before the GST rollout, we had to pay a plethora of taxes, including local body tax, octroi, excise duty, VAT, etc.,” says Ranka. “Now the multiple-tax structure has come down to one single tax. Because of that, profitability has gone up.” He adds that “Jewellers are able to recover the 3 per cent GST from their customers. Previously, we were allowed to charge customers only 1 per cent VAT. We had to pay the rest of the taxes out-of-pocket.”

The GST’s input credit mechanism has also helped. “We [jewellers] pay rentals for our stores. We invest in advertising and promotion. Earlier, we used to pay the 15 per cent service tax, with no refund mechanism. At the moment, while paying 18 per cent GST on rental and advertising, we can set it off as input credit. These benefits will surely help the industry in the long run,” says Kamath of Abaran Timeless Jewellery. Another positive result of the GST is hassle-free interstate movement of jewellery.

Along with these benefits comes one distinct cost. “I agree that the present scenario is quite positive for the trade,” says Mahesh Chandra Jain, president, Uttar Pradesh Sarafa Association. “But, one shouldn’t forget that retailers need to spend a good amount of time to follow compliance, and that is posing a challenge.”

One crucial aspect of the challenge is managing jobwork under the GST, given that karigars are largely unorganised. At Arundhati Jewellers, a chain with showrooms across Odisha, director Achyutananda Meher says the focus has been on educating the karigars and jobworkers about the new policies and taxation system, and sensitising them to the advantages of getting their paperwork in place. A similar situation prevails at Abhushan Jewellers. “To ascertain compliance at every level of the supply chain, my accountants have been assisting our karigars with the necessary documentation,” says Bohra.

Other retailers have outsourced this headache. Arjun Talwar, director, Talwar Jewellers, Chandigarh, avoids the entire issue by leaving it to his GST-compliant stockists. The stockists get any special jewellery orders manufactured by small karigars, and raise bills on their behalf.

The likelihood is that these varied inconveniences will not persist. Jobworkers who provide services worth Rs20 lakh a year or more are required to obtain GST registration and file GST returns. In time, they will. “I think jobworkers in that eligibility bracket can get themselves GST-registered quite easily,” says Ranka. Retailers can easily recover the 5 per cent GST on jewellery jobwork from their customers.

More than compliance, says Kamath, it is the flurry of amendment notifications that creates confusion. He gives an example of this piecemeal approach. “Until recently we had to pay the GST on the advance payments received from customers for their orders, as well as on the money received from customers under various saving schemes. The GST has to be paid up-front, so this was increasing our working capital requirement. Recently the GST Council [of the Union and state finance ministers] amended the rules to exempt these advance payments and savings schemes payments from the GST. I think the Council can look into other similar issues as well.”

The end consumer gets no relief or credit from the GST mechanism. This opens the way for a problem that faces retailers: valuation of each piece of jewellery. “The industry body should take up this issue proactively with the government, that the invoice value should be accepted,” said Rohan Shah, a leading expert on the GST, at the India Gold and Jewellery Summit in Delhi recently. “Unless there is a strong case for parallel payment, the GST authorities should not question the valuation.”

Jewellers’ pre-GST sales were a bonanza. Customers shopped in a frenzy to save on the anticipated taxes. “This happened mainly because buyers were not sure about the implications of GST,” says Kamath. He and Gadgil, among other jewellers, say their sales figures were extremely robust in June, especially during the 15–20 days before the GST came into force.

Since July, most jewellers agree that customers have come to terms with the new tax regime. “Irrespective of the amount, customers have been insisting on bills with the GST breakup, says Ajay Mangal, director, Gehna Jewellers, Gwalior, MP. “Customers complying with the new regulatory and tax mechanism is an extremely positive sign for the market.”

A jeweller in Punjab, however, has a different story to tell. “The majority of customers are not willing to pay the GST,” says Susham Singla, director, Jagdish Jewellers. “They prefer to go to jewellers who are not charging GST. In that case, some jewellers will end up paying the GST on the customers’ behalf.”

To remain price-competitive, confirms Rastogi of Lala Jugal Kishore Jewellers, “we have absorbed the GST cost”. The obvious corollary, he says, is that “The unorganised trade flourishes, as it is now cheaper by 2 per cent.” However, Venkataraman has a different take on the GST. “GST has made tax avoidance much less easy and thus put price and capital pressures on those in the industry who were so far avoiding the tax net. This has delivered an operating advantage to the law-abiding operators like us,” explains he. In fact, according to him, both demonetisation and GST had an extremely positive impact on Tanishq in Q1 and Q2 of FY18. As per the company financial results, Q1 revenue from jewellery in FY18 has gone up to Rs.3307.71 crore – 53% increase from Q1 FY17 revenue which was Rs.2150.59crore. The Q2 revenue from jewellery in FY18 is Rs.2710.76 crore – 36% increase from Q2  FY17 revenue (Rs.1987.51 crore).

PMLA pang

After the GST, it was the turn of the Prevention of Money Laundering Act (PMLA), 2002, to cause tension and uncertainty. In August this year, the central government applied the PMLA to jewellery sales. “It was a hasty decision by the government to make cash transactions worth Rs50,000 or more KYC-compliant,” says Ranka. The decision was rolled back in October.

This episode was proof of the costs of policy instability. Although the rollback was done before the festive season, the shortlived rules had already had a significant impact on business. Business had dropped by 50 per cent in value terms, says Ranka, who is based in Pune, in comparison with the same period in 2016. After the rollback, he says, business climbed back up to 70 per cent of the comparable for 2016.

Why did sales fall when the PMLA rules were applied? After all, KYC, or “know your customer”, is a fact of economic life for any Indian with exposure to formal banking. “The effect has more to do with consumer sentiment than anything else,” argues Ishu Datwani, founder, Anmol Jewellers, Mumbai. “Income tax is like a taboo; it creates fear among buyers.” Many buyers are unhappy about providing proofs of identity like their PAN number. Another reason is that jewellers themselves did not know the PMLA compliance process. “The first week or 10 days were full of confusion,” says Kalyanaraman of Kalyan Jewellers. “The customer experience was pretty bad, because different jewellers were offering different explanations to their clients.”

Kalyanaraman says he lost some customers, because “they went to jewellers who were not asking for their PAN number”. Datwani’s company, on the other hand, weathered the PMLA storm. “To comply with the norms, we revamped our billing system in such a way that one needed to enter the customer’s PAN number to generate an invoice,” he says. “Fortunately, our clients co-operated with us during that time.”

Other than the thankfully short-lived consequences of the PMLA, jewellers are concerned at where the central government has set the currency transaction reporting (CTR) threshold. “In the United States the CTR threshold is $15,000. In the European Union it is €7,500,” says Kamath of Abaran Timeless Jewellery. “The current Indian CTR threshold is Rs2 lakh, which is not at par with other countries in dollar or euro terms.”

Most jewellers say the government should increase this limit to Rs5 lakh. They argue that customers desire a sense of privacy when they are buying jewellery. The government, they say, should not be questioning a purchase of 200gm of gold at Rs5.50 lakh.

To summarise: things on the PMLA front are yet to settle, and jewellers expect a rerun of their PMLA experience in the near future.

Hallmarking: the purity in play

Speaking to reporters on World Standards Day recently, Ram Vilas Paswan, the Union minister for consumer affairs, clarified that the government plans next year to make hallmarking mandatory for all gold jewellery sold in India.

Jewellers are justifiably worried about this development. Compliance with universal hallmarking poses procedural and logistics challenges, because of the lack of clarity on process and implementation, and the absence of a strong network of hallmarking centres in India. On the retail side, however, the challenge looks even greater.

In a presentation at the recent India Gold and Jewellery Summit in New Delhi, H J S Pasricha, head (hallmarking), Bureau of Indian Standards (BIS), observed that in the last three years the number of hallmarking centres in India has grown by up to 20 per cent. “The number of jewellers under hallmarking should grow,” he said, “but only about 40,000 jewellers have joined so far. A World Gold Council report estimates 300,000–400,000 jewellers in the country. So we have a long way to go.” As for the location of these hallmarking centres, they are more prevalent in South India and western states like Maharashtra and Gujarat.

Even with a small user base of 40,000 jewellers, India’s hallmarking centres have marked more than 35 million articles per year during the past three years, according to data from BIS’ Hallmarking Department. As more and more jewellers turn to BIS centres, the usage will ramp up. It’s no surprise that, going forward, Indian jewellers are expected to face logistical bottlenecks. According to an official of the Indian Association of Hallmarking Centres, there are 513 hallmarking centres currently operational in the country at the moment. However, the reality is that the centres are not equally distributed across the country geographically. The majority of the hallmarking centres are located near the manufacturing hubs such as Kolkata, Jaipur and Ahmedabad.

According to that association official, there is sufficient infrastructure to handle the volume once hallmarking becomes mandatory. The hallmarking centres are handling 400 tonne of jewellery annually. Approximately, another 300 tonne of jewellery in the country is being sold without hallmarking. And, the infrastructure is adequate enough to handle the additional load.

As hallmarking becomes mandatory, says Ranka, the playing field will level and “competition among the jewellers in each market will become fiercer. Customers will have a bigger palette of options to choose from.” The hallmarking law that may be enacted soon, says Ranka, offers retailers a huge growth opportunity. Customers will be more confident about buying from brands or jewellers that are unfamiliar to them.

“Hallmarking is like a third-party surveillance on the jeweller. It assures customers that they are getting quality jewellery,” he says. “This is why hallmarking will help us grow our online business in a very big way.” Ranka Jewellers sells jewellery online through an ecommerce site and popular online marketplaces like Amazon.in and Flipkart.com.

However, the jewellers have huge concern over the implementation of UID (unique identification number) on jewellery. “Jewellers have concerns on two aspects. Firstly, the implementation of UID will generate huge amount of data and the majority of the jewellers doesn’t have the required infrastructure to handle such data. Also, given the nature of the business (customisation) and product (a jewellery comprises of various elements), it will be extremely difficult to introduce UID,” says Sankar Sen, director, Senco Gold and Diamonds, Kolkata.

Changing consumer mindset

However, the fact is that consumers are already adapting to the new reality. In August the Ministry of Finance announced that, “As a result of demonetization and Operation Clean Money, there is a substantial increase in the number of Income Tax Returns (ITRs) filed. The number of Returns filed as on 05.08.2017 stands at 2,82,92,955 as against 2,26,97,843 filed during the corresponding period of F.Y. 2016–2017, registering an increase of 24.7% compared to growth rate of 9.9% in the previous year. The growth in returns filed by Individuals is 25.3% with 2,79,39,083 returns having been received upto 05.08.2017 as against 2,22,92,864 returns in the corresponding period of F.Y. 2016–2017. This clearly shows that substantial number of new tax payers have been brought into the tax net subsequent to demonetization.”

Operation Clean Money is run by the Central Board of Direct Taxes (CBDT) and is aimed at checking whether the 1.8 million assessees who deposited large amounts of cash in their accounts, after demonetisation, were using black money. It is arguable, on the basis of data from past years, whether this rate of rise in tax assessees is as unusual as the government claims. Nonetheless, it is likely that demonetisation, together with the tough scrutiny of cash deposits and transactions, has had an impact on large cash purchases in the jewellery market. Clearly, these measures are helping to enforce a more tax-compliant retail ecosystem.

Looking up and forward

All said and done, says Ranka, the worst is over. From January 2018 he expects business to pick up. This is not to say that concerns do not persist. As Kamath says, “There are still some minor issues, which the GST Council will take another six months to sort out. Things will improve after the next two quarters, and business will be back on track. There is a lot of apprehension at the moment in the industry, and jewellers are taking time to get used to the changed scenario.”

“It’s time to break out from the comfort zone and gear up for a changing industry,” says Peeyush Prakash, director, Alankar Jewellers. “In the wake of increased accounting compliance, documentation formalities and systematic workflow, only the fittest — most organised — can survive.”

Venkataraman has already started witnessing a shift from unorganised to organised sector. “For multiple consumer benefits such as trendy designs, quality, store experience and branding, the market has already been swinging away from the small local to the large regional and national brands. The regulatory forces will accelerate that movement,” says he and adds, “The expansion strategy of Tanishq is determined by our views on the medium and long-term opportunity. There is no need to slow down the pace based on some hiccups.”

So, the key here for the jewellers is to adapt to achieve scale and success in the fast-changing modern economy. “If we as an industry still remain unorganised, we will not be able to grow our business like national chains in other sectors,” says Talwar of Talwar Jewellers. “Being organised and compliant will give us the mental peace and focus which eventually will help us manage our brand and expansion strategy better.”

“The year has been slow in terms of business. The numbers match those of last year,” says Gadgil, before reaching an optimistic conclusion: “Now the stage is well and truly set for organised retail. We foresee growth in organised retail in terms of customer acquisition. A balanced environment has been created, with lots of stability. Customer confidence will surely come back to the market.”